Exchange traded funds that invest in securities which have a lower volatility than the market can help combat gyrations. Low-volatility ETFs, especially those that invest in foreign stocks, have been proven to limit downside movement when market volatility is high.
“The evidence is persuasive. Low-volatility stocks have performed about as well as their higher-volatility counterparts–much better, actually, in foreign markets–but, obviously, with lower volatility and smaller drawdowns. The phenomenon is robust to period and market, volatility measure, and other factors known to boost returns such as momentum and value,” Samuel Lee, ETF analyst, wrote in a recent Morningstar article. [Low-Volatility ETFs to Protect Against Market Gyrations]
The iShares MSCI All Country World Minimum Volatility (NYSEArca: ACWV) has garnered assets beginning from $30 million to nearly $300 million in a few months. The low-volatility strategy has produced superior risk-adjusted performances in Treasuries, corporates, and futures, reports Lee. [ETF Chart of the day: Global Low-Volatility Fund]
ACWV is an attractive ETF due to the application of a global low-volatility equity strategy without the worry of untimely liquidation. Also, low-volatility strategies have produced higher excess returns in more-volatile, more-heterogeneous, and, presumably, less-efficient foreign markets.
ACWV tracks the MSCI All Country World Minimum Volatility Index, which aims to create the lowest-volatility portfolio possible with the securities in the MSCI All Country World Index, a global market-weighted index, reports Lee. [BlackRock Lists Four Low-Volatility ETFs]
The largest risk to the low-volatility strategy is the ETFs precise and active methodology to pick a few hundred stocks to represent the world market. Tracking error is the biggest threat to the performance of the ETF due to the Barra equity model. Minimum variance is the goal, with areas such as risk factor exposures for each security in the MSCI ACWI, the covariances of all the risk factors, and the covariances of all the securities at play.
The ongoing Eurozone drama is sure to keep market uncertainty high, and the slowdown in the U.S. economy will add to this. In other words, market volatility is here to stay for a while, so a low-volatility ETF can help protect a portfolio.
iShares MSCI All Country World Minimum Volatility
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.